DEFINITION of 'Interest Sensitive Stock'

Any stock with a price that is extremely sensitive to changes in interest rates. Interest sensitive stocks are shares that will see large price changes relative to small movements in the risk free rate. Stocks with large betas, which gauge a stock's price movement relative to the overall market, often will be quite rate sensitive, since, as the capital asset pricing model suggests, stocks with a large beta will see bigger swings when the risk free rate moves.

BREAKING DOWN 'Interest Sensitive Stock'

Although high beta stocks tend to be quite rate sensitive, other factors contribute to a stock`s sensitivity to interest rate changes, as well. The industry in which a company operates may play a large role; home builders will usually see their share prices fall when interest rates begin to reach a certain threshold. Companies with large debt levels will also be very rate sensitive, as their cost of borrowing is contingent on the risk free rate.

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